Buckle Up! Market Volatility is Back

What a difference a week makes! The stock market's fear gauge (VIX) was up over 100% on Monday while the Dow dropped a record 1175 points in one day. We ended a bumpy Friday with thousand point swings in the Dow and a market loss of over 5% for the week.

As an investor should you be worried? No, especially if you are in it for the long-haul. The reality is that over the past two years we have had an unusually calm market. The last meaningful correction was in January of 2016 when the market was down 10%.

Record Calm in the Markets

In fact we had a record number of months without a loss in the S&P 500. On average the market corrects (down 10%) at least once a year, even in bull markets. Below you'll find some perspective on this past week.

2017 Was a Fantastic Year

While all the headlines are focusing on the recent market declines, let’s not forget how the markets performed last year. Here is a summary in case you have forgotten:

• NASDAQ ended the year 28% higher – its best year since 2013;

• The Dow Jones Industrial Average ended the year 25% higher – its best year since 2013;

• The S&P 500 ended the year 19% higher – its best year since 2013;

The first four weeks of 2018

Further, let’s not forget how the markets performed through the first four weeks of 2018. Here is a summary of the markets through January 26, 2018:

• Stocks hit fresh highs again, with all the major sectors moving higher. This is the fourth-straight weekly gain to start the new year;

• NASDAQ advanced 2.3%; the S&P 500 moved 2.2%, and the DJIA climbed 2.1%. The end of the week saw all three indices finish at new all-time highs with YTD gains of between 7.5% and 8.7%

The Past week of 2018

Then during the fifth week of 2018, the market started moving backwards – a lot. 

• Stocks fell hard, eating into their impressive 2018 gains – the DJIA dropped 4.1%; the S&P 500 gave back 3.9%, and the NASDAQ erased 3.5% on Friday, February 2nd.

• The S&P 500 and Dow Jones then lost over 5% for the past trading week, ending February 9th, sending the markets into a technical correction (10% pullback).

Why now?

Market experts have spent the last week trying to explain exactly why the market pulled back when it did and even more time trying to predict where the market is headed. And we all know that no one can do either.

That being said, there are some underlying trends that investors ought to be aware of, starting with this: the market has been on an unprecedented 9-year bull-market run, so a pullback is long overdue. And the fact that people have been talking about a correction for a very long time probably had something to do with the recent decline.

But most would agree that last Friday’s jobs report triggered the sell-off. It sounds counterintuitive, but rising wages actually make the stock market nervous because rising wages could signal rising inflation, which is a headwind for growth.

The recent Employment Situation Report from Friday showed 2.9% wage growth from the year before, which signals a further tightening labor market and possibly an overheating economy. That in turn could prompt the Federal Reserve to increase interest rates faster than expected.

Some more perspective

The DJIA fell by 1,175 for a 4.6% decline on Monday. And while headlines scream that this was the biggest single-day point decline, on percentage terms there have been many worse days.

Remember that “only” 508- point drop in the DJIA in 1987? Well that was a 22.6% drop – a market crash.

At the very least, it might be helpful to think about percentages rather than points when trying to determine what constitutes a big market swing.

Tesla in space

So, I'll end my post with some happy news. My favorite company, SpaceX, successfully launched the world's biggest rocket carrying a Tesla to Mars. The message, "Don't Panic" on the dashboard of the Roadster is perfect timely advice for investors after this past week.